Equity Markets Finished the Week at Highs. Many Stocks Print Bullish Patterns. What’s Next?
Is the short-term strength in equity markets finished? Or, can we see more? Price action would suggest higher prices, as the equity markets finished near highs. Many big cap stocks printed bullish “W” patterns last week, implying a potential Santa Claus Rally.
What follows is a conversation I had this morning with my friend “Z”.
Tuesday we wrote this POST for subscribers as we began day 3 of a potential bullish reversal. Therein, we said if SPY were to continue, TICK cumulative needed to lead the way by identifying institutional interest. TICK would show us if they were bullish; it would rise as more buying hit the tape than selling.
Keep the following in mind; SPY traded above last weeks levels from the start
The Equity Markets Reversed: A New Bullish Cycle
First, acknowledge price action; we note all 35 hourly candles closed above the 20ma. That was a significant change in character from the previous two weeks, where the majority closed below 20ma.
Second, RSI moved above 50 on Monday and finished in the upper percentile. Bollinger Bands are narrowing, with the latter suggesting price action will settle above the large VBP support band at 274.50 (+/-). Also, notice the lack of VBP bands above that key support level. The VBP band just above this support, delineated with a horizontal line, up to 275.50 is entirely green. All buying above this level.
We read the close as profit taking and some selling into G20. This completes day 6 of the current cycle.
Equity Markets – SPY Daily
The daily chart shows price closing at the 200d. Your chart might be slightly different, as this version is unadjusted for the dividend. This way it equates to the same level as big brother SPX.
Anyway, here is the “W” pattern observed on most big cap stocks. Notice also that price action rose past 61.8% Fibonacci, suggesting a very strong bullish thrust. A thrust that reversed at 38.2%, for example, would have been a weak bounce by comparison.
TICK cumulative is rising!
This daily chart will remain bullish if we open above 275.90 (+/-). An open below these levels would be short-term bearish. TICK would also need to turn down and start printing lower highs to confirm a change.
Friday – After Hours (AH) Block Trades
Approximately 16 million shares in block size transactions traded above 275.90 (200d) after hours, not to mention all of the blocks that traded intraday. Red transactions signify trades at the BID. Following this, SPY rose and closed above these bids. Read that as a bullish close.
Many traders interpret this volume as nothing more than the end of the month weekly options (OPEX) settlements or imbalances. While that may be true, I’d still consider price itself and where we see SPY price action next week.
Following the same train of thought, I’d point to the fact that last week monthly OPEX traded much higher block size volume. Where is SPY now?
Moving along, and using the same consistent measurement and analysis, if we open above 275.90 and TICK continues higher, we will most likely complete these “W” patterns and SPY (SPX) will follow through.
Simply stating an opinion, “oh, this is due to OPEX” really doesn’t help a trader. The weight of the evidence suggests a test of 281.00 (+/-) the center point of the “W” pattern, if we open above 275.90 on Monday. A break of 281.00 (+/-) would confirm a bullish breakout.
Twenty (20) of the Dow Industrials are trading above the 20/50d. Only two (2) are below the 20/50d; AAPL and UTX. Many are printing very bullish patterns and ready to break above recent resistance (pivot) highs. And, check out pharmaceutical stocks like MRK, LLY, PFE, JNJ, and ABT.
We read this price action as bullish. More below.
DOW Composite: DOW Theory
The Dow Jones Composite Average tracks 65 prominent companies, comprising industrial, transportation and utility stocks.
As a refresher, if the industrials are producing and the transports are delivering said durable goods, then this chart should reflect that activity.
The “W” pattern is obvious. Price is above the 20/200d and notice VBP (look left) is tapering off, suggesting a lack of supply until the index gets back to 8750 (horizontal line). RSI is climbing above 50 and MACD is above its signal line. Finally, DJA volume is above average.
In other words, there is nothing bearish about this chart.
Equity Markets Meet the ARCA Institutional Index (XII)
This index tracks the 75 stocks institutions commonly hold in their core portfolios. Note the index is trading above the 200d. This is something we like to check at important levels.
If XII price action pierces the overhead the 50d (dotted line) it would suggest a test of the top of yet another “W” pattern at 1290.00 (+/-).
Equity Markets – Breadth, Sentiment, and Indicators
Our quest is to reflect on the weight of the evidence. Price and volume are what matters. Ponder the following observations leading into Monday:
- G20 news will most likely have a short-term impact on equity markets
- The SPX1500 Composite or broad market is on a buy signal
- Breadth, NYAD, NYMO, NAMO is more bullish than bearish
- (TICK) Sentiment: What institutions are doing is bullish
- Seasonality is bullish; watching for a Santa Claus rally
- VIX closed below the 50d for the second time since the October top = bullish
- Bond stock ratio is short and long-term bullish
- Risk on indicators are bullish IWM in “W” pattern, biotech improving
- Debt is the one caveat that needs to improve JNK/HYG need to bounce
Until then, when you catch someone talking about what they “THINK” will happen, you can point to what is actually happening. Continue relying on the data to formulate an educated plan or strategy for the days and weeks ahead. Those people with magic 8-balls will continue to be perplexed by the markets.
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Have a great weekend.
As always, Happy Trading!
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